Neiman Marcus Being Purchased for $6 Billion as Equity Firms Exit

Tuesday, 10 Sep 2013 06:53 AM

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Luxury merchant Neiman Marcus is being purchased for $6 billion from its current equity firm owners.

Ares Management and Canadian Pension Plan Investment Board announced Monday they are buying the luxury chain Neiman Marcus for $6 billion, The Associated Press reported. The two new owners will hold an equal economic interest in Neiman Marcus, and the company's management will retain a minority stake.

"We plan on investing meaningful capital into the business to ensure Neiman's long-term position as the unparalleled leader in luxury retail," said David Kaplan, senior partner and co-head of the private equity group of Ares, based in Los Angeles.

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The deal, which is expected to be finalized in the fourth quarter, would end control of the luxury retailer by private equity firms TPG Capital and Warburg Pincus. They bought the company for $5.1 billion in 2005 during the booming luxury years when affluent shoppers scooped up $5,000 handbags with abandon and then held onto it during the depths of the recession and recovery period.

But while overall luxury sales have rebounded, that over-the-top spending has lost its froth. In fact, the luxury market is showing signs of a slowdown. Consulting firm Bain & Co. predicts luxury sales will be up 5 percent to 7 percent in the Americas this year, down from 13 percent in 2012

Analysts say that the two equity firms had wanted to get out of Neiman Marcus after holding on to it for eight years. Equity firms typically own an investment for anywhere from three to five years, says Mark Cohen, a business professor at the Columbia Business School and the former CEO of Sears Canada.

"I think they were itching to get out," Cohen says. "They would have exited sooner if not for the onset of the recession."

In June, the equity firms that currently own Neiman Marcus filed a plan for the Dallas-based company to go public while at the same time searching for a buyer. The new deal likely ends the retailer's opportunity to go public. Michael Appel, who runs a retail consultancy called Appel Associates, said the old owners probably decided to sell the business outright instead of dealing with an IPO market that has been choppy.

The agreement follows an acquisition of another big luxury player: Saks Inc. The New York company, which operates Saks Fifth Avenue, recently agreed to sell itself to Hudson's Bay Co., the Canadian parent of upscale retailer Lord & Taylor, for about $2.4 billion

Karen Katz, president and CEO of Neiman Marcus, said in a statement that she has great confidence that Neiman Marcus's customers, employees and suppliers will share in her enthusiasm that its new investors will help pursue a focus dedicated to luxury fashion, innovative marketing and customer service.

Neiman Marcus's top management is expected to stay intact.

Neiman Marcus, founded in 1907 by Herbert Marcus Sr., his sister Carrie Marcus, and her husband A.L Neiman, has had a series of owners during its rich history.

The company was sold to department store operator Broadway-Hale in 1969 and began planning its national expansion outside of Texas. Through a series of deals, the retailer came under the ownership of the conglomerate Harcourt General, which also published textbooks and owned movie theaters.

In 1999, Harcourt General spun off Neiman Marcus stores and Bergdorf Goodman as a separate, publicly traded entity, the Neiman Marcus Group. In 2005, TPG Capital and Warburg Pincus bought the company for $5.1 billion in 2005, taking it private.

Neiman Marcus, which operates 79 stores, has a long-held reputation for coddling its wealthy shoppers with customer service that goes above and beyond the standard. In 1984, it established InCircle, the industry's first customer loyalty program, which now has 144,000 members and generated 40 percent of the company's total revenue in the latest fiscal year. Neiman Marcus also expanded its business online in 2000, becoming the first major luxury store to do so. A little more than 20 percent of its revenue comes from online.

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Now, like other upscale retailers, Neiman Marcus is trying to reinvent its shopping experience for its customers who are increasingly using their tablets and smartphones to research and buy their designer goods.

Jim Skinner, Neiman Marcus's chief financial officer, told the AP in a phone interview that the new owners are very supportive of the company's strategies and noted they spent time in the stores to do research and did their "due diligence."

For the first nine months ended April 27 of its fiscal year, Neiman Marcus had revenue of $1.09 billion, up 3. 8 percent from $1.06 billion in the year-ago period. Net earnings were $70.7 million, up 12.9 percent from $62.6 million in the year-ago period.

Executives at Ares Management couldn't be immediately reached for comment.

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